Village ditches radio for roller-coasters

Village Roadshow
has moved forward the opening of its new theme park in Sydney and is close to finalising plans to build a theme park in China as part of its focus on “pure entertainment" business.

The deeper push into theme park business comes as Village prepares to end its 32-year involvement with the radio industry.

Chief executive
Graham Burke
said the sale of Village’s 52.5 per cent stake in Austereo Group, which includes radio stations 2Day, 3Fox and Triple M, to Southern Cross Media for $390 million would create “some sadness".

“But we want to give ourselves new options and opportunities for Village and that requires cash," he said.

“We are just circus folks. We sell tickets to cinemas and theme parks. Our focus is on pure entertainment businesses. We’re not interested in anything more high-falutin’ than that."

Speaking for the first time about Village’s decision to cut Austereo loose, Mr Burke said he and brothers
John
and
Robert Kirby
would formally decide over the next few months where to spend the proceeds from the sale. (John Kirby took Village into the radio business in 1979, buying part of the 2Day licence.)

But the troika, who have run Village for more than 20 years, have already earmarked the theme park business as their top priority.

The $85 million development of a Wet ’n’ Wild park in western Sydney has been fast-tracked and it will open in late 2012 or 2013, rather than late 2014 as originally planned.

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Mr Burke said a plan to open a theme park in China with one or more partners was “well advanced", but he would not discuss when it would open or how much Village would invest ­in it.

Village looked at building a theme park in China in the mid-1990s, in partnership with American entertainment giant Warner Bros – an original partner in its Movie World theme park on the Gold Coast – and Hong Kong company Golden Harvest.

“It’s like a fishing expedition. We’ve put out a lot of lines. One fish is biting pretty hard and others are nibbling, but we haven’t landed any partners yet."

The Austereo exit comes hard on the heels of the $115 million sale of Village’s Sydney Attractions Group division, which includes Sydney Aquarium, to European company Merlin Entertainments Group.

Some of the proceeds from the sale, which was expected to be completed by late February, would be used to fund a 12¢ special dividend payment to Village shareholders.

Chief financial officer
Julie Raffe
said the remaining $80 million from the Sydney Attractions Group sale would be used to reduce net debt, which was $747.8 million at December 31. (Village’s total debt of $1.2 billion included $457.7 million of debt in its part-owned United States division, which has no recourse back to ­Village.)

Selling out of Austereo would remove the radio company’s $203 million debt from Village’s books.

If all the money from the Austereo sale were applied to it, Village’s debt would drop to about $100 million. “If that happened, people would say we had a lazy balance sheet," Ms Raffe said.

Not that all of the Austereo money would be used to pay down debt: Mr Burke said some could go to shareholders and some would be used to expand the theme park division, which runs parks in Australia, Hawaii and Arizona.

“We were happy with our debt position until May 2008," he said. “The GFC changed our attitude. It made us think, ‘What if there’s another ­gyration?’ "

For years, Village was criticised for carrying too much debt and hiding its debt position in byzantine accounts that were signed off by a board that lacked independent directors.

Acknowledging the company had “corporate governance issues", Mr Burke said it had worked with adviser UBS over the past two years to address those issues.

Tony Huntley, deputy chief investment officer at Village shareholder Mutual Trust, said the company’s accounts had become more transparent, its balance sheet more conservative and its management more accessible.

Late last year, Village tackled its often criticised capital structure, merging its ordinary and preference shares. As a result, the stake held by Village Roadshow Corporation – which is owned by Mr Burke and the Kirby brothers – dropped from 68 per cent of the ordinary shares (it held no preference shares) to 51 per cent of the merged stock.

“We’ve put a lot of good building blocks in place, with the capital restructuring, hiring independent directors, selling non-core assets and the plan to reduce our debt," Mr Burke said.

“Look at our share price; we must be doing something right." Village shares have climbed from $1.92 to $3.25 over the past year.

Not all fund managers are fans of Village, raising concerns about the cyclical nature of the cinema industry, the theme park division’s vulnerability to bad weather, and the high salaries paid to its executives. Mr Burke was paid $4.2 million in 2009-10, while Robert and John Kirby received $3.7 million and $3.6 million ­respectively.

A short-lived plan in 2009 to privatise Village did not help its corporate reputation.

The plan was abandoned just two weeks after it was announced, prompting claims the announcement was simply designed to bump up Village’s shares, which at the time were trading below $1.20.

Mr Burke said the privatisation plan was real, “but we came to the view we didn’t want to take on the debt". He said privatisation had now been “absolutely ruled out", as the Burke and Kirby families wanted to maintain a liquid market for Village stock if they ever decided to sell.

“Village has worked hard to improve its corporate reputation," said one fund manager, who did not want to be named.

“But it still operates in risky industries and is still tightly controlled by Burke and the Kirbys, who ran it like a private company for many years. People are still wary about them."

The impact of bad weather and a poor crop of movies was evident in Village’s December-half results.

Normalised net profit fell 42.3 per cent to $33 million as its Gold Coast theme parks were hit by 87 days of rain during the six-month period and its local cinema chain was crunched by the absence of Avatar – which became Australia’s highest-grossing movie during the 2009-10 summer, with ticket revenue of $115 million – and a lack of big hit movies.

Mr Burke said Village was “extremely pleased with the [December-half] results, given the weather and the lack of an Avatar-like hit".

The Gold Coast theme parks’ earnings were down 11.5 per cent to $37.6 million in the December half and fell 14.7 per cent to $14.5 million in January, which is usually their most profitable month.

“Even with the terrible floods in Queensland, the theme parks on the Gold Coast still had earnings of $14.5 million," Mr Burke said.

“That shows how resilient the theme park business is. It’s a great business. It doesn’t face any technological threats. You can’t replicate the whoosh of a roller-coaster at home or the screams of people on a ride.

“As long as there are children, teenagers, parents and grandparents, there will be theme parks."

Mr Huntley said Village’s theme parks generate “significant" free cash flow and, in the case of the water parks, “require a lot less maintenance or stay-in-business capex than what is reflected in the annual depreciation charge".

“They are where the boys are and where the girls are, so they are very popular with teenagers," he said. “Parents with younger children like them because they are safer than beaches."

Although theme parks would dominate Village’s plans over the next few years, Mr Burke said it would expand its eight-cinema Gold Class chain in the US (which is 30 per cent owned by Village) and set up more Gold Class lounges and large Vmax screens in its Australian cinemas.

“The Gold Class sections in Australia are our single most profitable business," he said. “Gold Class, V-Max and 3D technology add fashion and vibrancy to our cinemas, but we are still only as good as what’s on the screen."

Mr Burke predicted the recent hit-movie drought would break in the June quarter, when movies such as Cars 2, The Hangover 2, Pirates of the Carribean: On Stranger Tides and Kung Fu Panda 2 were released.

New releases for 2011-12 included the second part of the final Harry Potter movie, Transformers 3, Mission: Impossible 4, The Adventures of Tintin and Happy Feet 2.

The second Happy Feet movie is being made by the US-based Village Roadshow Entertainment Group, which is 40.4 per cent owned by Village. Its other projects included Fury Road, the next instalment in the Mad Max series.

Village did not book a profit from its share of the US business in the December half, but Mr Burke said it was a key part of the company, as it fed product into its Australian cinemas and film distribution divisions. Plans to float the US company were still being discussed and a decision would be made in three to six months.